Highest and best.

These three words have been uttered with surprising frequency in recent months by listing agents all over town, especially those who represent properties in the $800,000-to-$1.3 million segment, where demand exceeds supply.

If you're already familiar with those three words, you may have been asked to ante up the most money you're willing to spend on a special property -- one that other buyers want, too. If not, and if you're a potential buyer, read on because these words may soon be directed at you.

It starts out with a really nice and very well-priced property -- a rare commodity in the current market. Agents see it on a Tuesday or Thursday tour, and then rush their buyers to have a look. By the end of the weekend, there are multiple offers. "Please submit your highest and best offer by Monday close of business," the listing agent says. "Best offer takes the house."

"Omigod," say the buyers. "What should we do? It's a down market, and we don't want to overpay. And by the way, how could this be happening? Everyone knows it's a buyer's market, and we're supposed to be the ones in control. But it seems the seller has all the leverage here."

A common reaction. And an accurate one.

Here's what every buyer who agrees to participate in a "highest and best" offer situation needs to know.

1. A test of resolve. Multiple offer situations are a test of will, of emotion and of restraint. The sure way to win is to bid above asking price, waive your mortgage and appraisal contingencies and agree to close "at the seller's convenience." But giving away the farm is not always necessary. I've seen bidding wars in which the ultimate sale price doesn't come close to asking price. I've also seen them where most, if not all, of the bids far exceed list.

2. Price just one factor. But it's not just about the price. The terms (closing date, absence or presence of a mortgage contingency) may be just as important, and sometimes are even more important. In the past year, I've participated in numerous bidding wars in Westport and Weston, and I've seen this first hand.

3. To waive or not to waive? In today's lending environment, the surest way to win in a contest of "highest and best" is to waive your mortgage contingency (which also waives your appraisal contingency). Not everyone is able or willing to do this. But unfortunately, that's what it takes. In every bidding war that my clients lost, they had a mortgage contingency. In those that my clients won, they did not.

4. How much do you want it? How you respond to a request for your "highest and best" depends on how much you want the house. If you won't be crushed if you don't win, then write up what you consider a strong offer, but don't do anything extra -- like waiving mortgage and appraisal contingencies or offering to close in 30 days. But if the house is the best you've seen after months of looking -- if you've already figured out where your furniture will go and will be devastated if you lose it --well, that's another matter.

5. Going to your limit. Your "highest and best" offer should represent the absolute most you are willing to do to get the house. I tell my clients it should be the combination of ingredients which will allow them to walk away from the house if unsuccessful, satisfied that they did everything they were willing to do to get it -- even if the winning bidder pays only $1 more. Because in most cases of "highest and best," you won't have another chance.

6. The winner can lose. Because "highest and best" contests don't have any official rules, they may sometimes end up differently than expected. Twice recently, my clients have won such contests, only to be notified a day later that one of the unsuccessful bidders upped their offer to something higher and better than theirs. In most cases, the original winner is given the chance to match the higher offer. But sometimes, especially in a short-sale situation, another party can snatch the deal right out from under you. Unless you are willing and able to retaliate with an even higher and better offer that's good enough to win it back.

"Highest-and-best" situations are a bonanza for sellers, but may be a source of frustration and consternation for participating bidders. If you find yourself in such a contest, make sure you understand and are willing to accept the risks, rewards and realities of the process. Because there are more losers than winners in this game, and the rules may change unexpectedly.

Evi Coghlan's "The Real Deal" appears every other Friday. She is a licensed real estate agent with the Riverside Avenue office of Coldwell Banker and a former marketing consultant to Fortune 100 companies. She may be reached at 203-247-6691, by emailing her at evi@evicoghlan.com, or visiting www.evicoghlan.com.